The International Swaps and Derivatives Association has announced a new proposal to address the controversy of the l Hovnanian Enterprises Inc refinancing deal. GSO Capital Partners agreed to lend money to Hovnanian on the condition that the company default on a small portion of its bonds, in an effort to trigger a payout on credit-default swaps. ISDA is now proposing that failing to make a bond payment wouldn’t trigger a CDS payout if the reason for default wasn’t tied to some kind of financial stress.
“It could be a good solution if there’s enough confidence in the DC’s ability to get it right and to avoid controversy,” Julia Lu, a law partner at Richards Kibbe & Orbe LLP whose specialties include derivatives, said of the proposed fix. “The problem is going to be in any given situation there are different interests to be balanced against each other.”